THEORY OF

According to the OF COMPARATIVE ADVANTAGE,

countries should specialise in producing goods they have a
comparative advantage in producing and trade for goods
they do not have a comparative advantage in producing.

A country is said to have COMPARATIVE ADVANTAGE (CA)

ASSUMPTIONS
2 countries in the world: US and Vietnam
2 goods being produced: Textiles and cars
Each country has 2 units of resources, and
devotes 1 to the production of each good (1)
in producing a good if she could produce it at a
compared to another country
(e.g. in column (2), US has CA in producing cars while
Vietnam has CA in producing textiles)
During specialisation, Vietnam specialises, devoting 2 units
of resources to produce textiles and US specialises ,
devoting 1.7 units to produce cars and 0.3 units to produce
textiles (3)
The Terms of Trade is 1 car : 4 textiles,
and the US trades 18 cars for 72 textiles from Vietnam.

(1) Production before (2) Opportunity cost (3) Production after (4) Quantity of goods after
Specialisation & Trade of producing 1 unit of specialisation specialisation and trade

Textiles Cars Textiles Cars Textiles Cars Textiles Cars

100 50 1/2 car 2 textiles 30 85 102 67

80 10 1/8 car 8 textiles 160 0 88 18

180 60 - - 190 85 190 85

Note: Only after trade and specialisation, both countries enjoy more of both goods.
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